Anatomy of a Doctorpreneur ⅘ – The Funding

Your work in clinical medicine has given you a unique perspective and insight. You have asked the right questions and identified an important opportunity for improving care. You want to bring this innovation to the world.

You have the fortitude, ambition and grit required become the founder your own health technology startup. In fact, many of these qualities are what gave you the drive to succeed in your medical career.

You have researched your market and your competitors. You have developed your innovation from idea to a minimum viable product (MVP). The signal from potential customers is positive.

You are aware of the skills, knowledge and qualities that are needed to take the project forward. Your first key team members, advisors and mentors are in place.

You are ready to move forward, but something is missing. People, materials, equipment, stock, marketing… These things are going to cost MONEY.

Where will you find the funding to take things forward?

Welcome back to part ⅘ of my series of posts about the world of health innovation and startup culture. This series was inspired by the excellent Doctorpreneurs day conference that I attended in November last year (2016). If you have missed any earlier posts then please do catch up.

Why do health technology companies need investment?

Many companies have business models that require early investment in order to become viable:

A new medical device may be fantastic but require investment in further research & development to bring it to eagerly awaiting market.

A critical mass of customers might need to be recruited before a service becomes useful. Many companies rely on this “network effect”. Facebook is only useful because of all the other people who use it.

The product may only become profitable when delivered at a certain scale or volume.

The key to success in some markets is to achieve a dominant player advantage. It might be necessary to fund a period of rapid growth to outpace competitors and become the dominant player.

Other companies find that they are able to pay the bills and have money left over to self fund their own organic growth. Those with a good patent, well protected intellectual property (IP), or few competitors might find themselves in this fortunate position. However, these businesses should consider what they may be missing out on in deciding not to seek external funding. Could additional money be used to accelerate growth, getting their product to more of those who need it quicker, increasing both profits and margins and outrunning competitors.

When deciding to accept investment, it is important to consider what “added value” (or negative baggage) the investor will bring to your venture. Do they have experience or connections that will help the success of your company?

What are the potential sources of funding?

The funding options for health tech startups are essentially the same as those available to fledgling companies in other industries, with perhaps a few subtle differences.

Bootstrapping – Many entrepreneurs will use their own cash and assets to fund their business until it turns a profit. Using their own money allows founders to avoid giving away equity and keep complete control. But if the venture fails they have lost their own money. Obviously it is important not to invest more money than you can afford. However medics, particularly those at a later stage in their careers, can have deeper pockets than many. Younger medics, on the other hand, can look to their future earning potential to make up losses. Also, for many it might be possible to not quit the day job entirely, and continue to earn a wage in medicine part time.

Friends and family – Perhaps an extension of bootstrapping. If you have enough faith in the project to risk your own money, maybe you would also be comfortable risking money from your nearest and dearest? This will be highly dependant on your circumstances. Families differ in their resources, but some do have traditions of giving the next generation a leg up.

Grants – Local and national governments are keen to support the formation of new innovative companies. It is worth exploring whether your business is eligible for a regional or industry specific grant or prize.

Crowdfunding – Recent years have seen the emergence of peer to peer finance. There are now a variety of different models. These allow companies to obtain finance without turning to traditional banks or investors. A unique attraction of these platforms is that people motivated enough making small investments in a company can become early customers and advocates for the business. Remember, this sector is young, so tread cautiously:

Peer to peer equity funding: Sites like CrowdCube allow companies to find private investors who will invest cash for a share of equity.

Peer to peer loans: Companies such as Funding Circle have been around for some time now. They allow companies to seek small loans. Individuals and institutional lenders spread their risk by spreading their investment across a portfolio of different companies.

Crowdfunding: More traditional crowdfunding sites like Kickstarter allow potential customers to back innovations that they want to see created by paying for the product up front. Kickstarter do not allow medical devices or services, but this could be an option for more consumer focussed products.

Accelerators and Incubators – These organisations are focussed on helping young companies grow and reach their market. In return for a small equity stake they provide funding, access to workspace and trusted advice and expertise. Their connections in design, development, IT and manufacturing and also with venture capital and other investors can be invaluable. An added advantage of these organisations is that they bring together a network of similar minded founders and mentors. They can also add legitimacy when attracting further investment. “Accelerators”, such as Digital Health London tend to focus on the growth of existing companies. “Incubators” provide a place where innovative or disruptive ideas can mature in the hope that some will emerge as viable companies.

Venture capitalists – Professional investors and funds who specialise in specific sectors, including health technology. They are often able to offer technical and managerial assistance to companies as well as investment. Ash Patel of Mercia Venture Capital, a former anaesthetic trainee, spoke at the conference. His fund looks to invest in strong, defendable, insight or IP based companies. He added that healthcare companies often have inherent defensibility as medical knowledge is a barrier to entry in itself.

Angel investors – Angel investors are similar to venture capitalists but operate on a smaller and more personal level. They are often individuals or small groups. Angel investors can fill that early-stage cash need between self funding, friends and family and venture capital.

Corporate Investors / Strategic Partners – Large existing companies within the health sector can make suitable investors or partners. In recent years pharmaceutical and medical device manufacturers have been “outsourcing” their research and development functions. They often take stakes in or purchase smaller companies with innovative ideas, technology or IP. This can be cheaper and more effective than developing these in house. These established players can make good partners due to their financial resources and experience with trials and regulatory regimes. However, be cautious of partnerships that might compromise your values or limit opportunities in the future.

Debt – Not to be overlooked is the option to take out traditional business loans to fund growth. This avoids the need to give away equity. Naturally it would be advisable to avoid personal debt and keep liabilities limited to your corporate vehicle.

A final word of caution…

Raising investment through rounds of funding will be challenging. Be sure to get good advice from someone who knows the ropes, and preferably has experience of actually doing it before.

What next?

If you want to learn more about founding a medical start up, taking your idea to the next level, or getting involved in the digital health revolution, then the Doctorpreneur website is a great place to start.

If, like me you are based in the East Midlands, then a new HealthTechNottingham group has been formed by a group of local doctors and their friends in the tech industry. They can currently be found on meetup.com

Please look out for the next articles in this exciting 5 post series about medical startups.